Gold in deflation, 1929 = LOW

[GoldCookie]

I went to give a look at gold and silver during the crash and saw it went down. Sure, it was still a good thing for people to have a part of gold in their investment strategy since
1- it is physical and can be used when everything is worthless
2- it goes up when the crash is finished since everyone wants stability

BUT, why are so many going for gold/silver as a protection against the crash itself? There is a difference between inflation and deflation, and it seems that while an inflation brings the price of gold up, a deflation brings it down, at least for the moment (years) the economy is drowned.

So would anyone here believe that money is bad in a deflation, while in fact it goes UP (to the condition that your bank doesn't keep it, so you need to find a good ranked safety bank like some in Switzerland, short stocks or be in some GOOD bear fund, etc.). So why should someone keep that much gold if during a crisis gold goes down like other commodities, and he could in fact be better off by doing something else? In a deflation, the value of money goes up and the ones with money (not taken by banks, etc.) are able to buy easily. It thus seems to me that a balanced portfolio with gold, bear stuff, money in a SAFE place is a solution to look at...

Reference: Conquer the Crash, Bob Prechter (http://www.amazon.com/exec/obidos/tg/detail/-/0470849827/102-6978831-8728128?v=glance)

[lhslancers]

you say Bob who? Show him this.

[HistoryStudent]

As there are NO dumb questions on this forum I wanted everyone to have some fairly good knowledge about GOLD & DEFLATION.

You can pay $120.00 for the report or get it for free from the link below. Your choice.

http://www.gold-eagle.com/research/ascanindx.html

a 12-part Series, "Gold in a DEFLATION."

[AuNuggets]

At this stage of "the game", deflation is only a very remote possibility.

Why ?

Because the current world fiat system must either INFLATE or die by outright default. There is no in between, no other choice. The bubble economy as it stands now must inflate to keep enough "money" in the system to pay the interest on all of the outstanding debt. Default is the only option, government AND private.

Sure gold and silver will likely fall in dollar or currency related value during a true deflation, but so will most everything else except for cold hard cash. Gold and silver will not fall AS FAST as everything else, but in dollar terms, it will still likely be worth less. Some of the advertising hype you hear about gold and silver "protecting you through good and bad, ups and downs, inflation AND deflation" is more than a bit misleading. The old adage that "cash is king during deflation" however, is a known economic truth and has held true through all deflationary periods.

[Buster]

Prechter is the guy who predicted gold would fall to $200/oz and silver to $3/oz. This was last year when gold punched through $300 on its way to $400 and beyond. As we now know, he was as wrong as a man can be, and yet, people are still quoting him. Amazing.

Deflation? That's a good one. Check out the commodities charts, or the price of food, or automobiles, or health care, etc...looks like we're headed for hyperinflation.

The world is so different today than in 1929 that I see no point in comparing the crash with what lies ahead. Remember, the U.S. silver stockpile is gone, and unlike 1929, almost no one has any.

Right now, silver is holding at around $6.30. That's what the COMEX says it's worth. If you want to know what it's really worth, go to E Bay and check out the silver bullion auctions. It will surprise you. Right now, there is a 1 oz generic silver round (Buffalo head reproduction, no big deal) with six bidders, currently at $10. Add on an average cost of $3.50 for shipping and insurance, and the winning bidder is going to pay at least $13.50 for 1 oz of generic silver.

The value of a thing is what someone is willing to pay for it.

[IrishGold]

The value of a thing is what someone is willing to pay for it.Aye, as I have said many times, value is decided in the marketplace by a willing seller selling to a willing buyer. At that moment, value is decided for that moment! In one hour or one minute, that value can change.

[GoldCookie]

Well thanks alot, I really was curious to know what you'd answer. Because of this "cash in deflations", I still believe in a balanced portfolio, with some longs, shorts, gold/silver, and cash. Of course, presently I'd put more weight on the gold side compared to usually. Gold is also what stays with its same value (as Irish says), it is what cash is supposed to be.

About Prechter, I'm not too sure if he's right with his "socionomics". Anyway, it's certainly not absolute if it has its elements of truth.

[Ander]

I do think there is possibility for deflation, at least in some areas. Debt is deflationary...the Fed's policies are currently inflationary. If the Fed were to reverse course, to avoid a dollar collapse for example, it could lead to deflation.

If gold bottomed in 1929 in the crash, well, we are past that point already in this cycle...that wouldve been like a bottom in 2000 or so. Well, we had a double bottom in 1999 and 2001 at around 250. So that seems fairly similar.

What did gold to later in the 30s? Well it was illegal to own it, but the price increased some 60% when Roosevelt revalued it at 35$ an ounce instead of around 21. Without a gold standard this time, and with inflationary monetary policies, it should be even better this time.

I think we could see deflation in some areas, inflation in others...
Gold however, should increase. Looking at pasKondratieff cycles 9or at least the last one), gold bottomed at the start of the crash, then went higher. We have already had that decline.

Someone wake up Prechter. The rest of the bears made money on Gold/Silver/Mining shares this past year.

Now, if the Fed reversed course, that changes everything. Until then....we are on a deflationary path.

[Ander]

About Prechter, I'm not too sure if he's right with his "socionomics". Anyway, it's certainly not absolute if it has its elements of truth.


I think Socionomics (Elliotwave Theory applied to sociology) is actually very interesting. I think Prechter is right in the long run on where stocks are going, though I doubt they will fall as far as he thinks, and he was too early in his call, and missed the B wave in this decline. Also, he seems to have missed the start of the gold bull, thinking its a wave 4 rally, and we have wave 5 coming up, not a new bull.

Who knows, maybe he'll be right in the end, but it looks unlikely to me at present, given the fed's actions.

[Buster]

I have no doubt that Prechter's deflation scenario will one day play out...if you're willing to wait long enough. Before it happens, however, I expect gold, silver, copper and other valued and limited commodities to exponentially eclipse all previous highs. This is runaway hyperinflation, which of course will eventually pass, then a deflationary crash until some equilibrium level is reached.

But what's the point of making predictions that something will occur if you have no idea when it will occur? Everything you can imagine will eventually occur, given enough time, but so what? I think the trick of the game is knowing approximately when something is going to happen, if you know what I mean.

[AuNuggets]

Ander: "I do think there is possibility for deflation, at least in some areas."

Isn't that kind of like being "sorta pregnant"? You either have inflation OR deflation, you can't have both simultaneously. You either have a contracting money supply (deflation) or an expanding money supply (inflation), but both cannot occur at the same time. Now in the realms of "prices" of consumer goods and services, that's a different story, but rising or dropping prices are only the "effects" and not the "cause".

Buster...... Timing is everything ! :applause_

[TheSimpleton]

Am I missing something here?

Gold went down during the Depression, sure, because no one HAD $400 to buy it with, if they had $400, they'd buy a house. And that's the point. During inflation, the dollar price of things goes up, but so does your paycheck. Nothing changes but the numbers (Okay, more happens, but let me make my point.) In deflation, all the numbers go down and again nothing changes, in theory. The only thing that matters is the BUYING power of that number.

Darned if I can find it, but only yesterday, a well-respected reviewer (I can't help thinking Droke, Mauldin, or Hamilton but apparently not) was arguing AGAINST the expected hyperinflation, saying the outlandish debt would soak it up. His closing line was saying we'd have not a "$50 cup of coffee, but more likely a $.25 cup of coffee that nobody has."

The point is, it doesn't matter. If there is so much money that it has no value, gold has value. If money is in short supply, gold still preserved that value during the decline. That's the point of gold. If you can buy a former $300,000 house for $3,000, then what difference is it if Gold is $200/oz? Your buying power still went up 50 times.

To me the beauty is, I don't have to know, although I'd still like to find out. Gold and silver is an equal hedge against both. One thing we're all going to learn real quick is to stop thinking of the dollar as sitting still. We may have both inflation in stocks, commodites, and housing with deflation in foriegn-based retail, wages, and pricing power for quite some time. Doesn't matter to me. Just keep an eye on what an ounce can BUY. At the moment, price inflation has not caught up with the gold price, so I'm ahead.

TS

...If anyone can find that article, I'd appreciate it. It answers this question much better than I can.

[JoeB]

Simpleton


http://www.321gold.com/editorials/pollock/pollock012004.html

Pollock & Mackenzie @ 321.gold

[AuNuggets]

TS...... it's just as important to stop thinking of "inflation" as rising prices, and "deflation" as falling prices. The prices are only the "eventual" effects of contraction and expansion of the money supply.

In a true inflation, all other things being equal (and eventually they are - i.e. it's all a balancing act), the metal will rise along with everything else..... consumer prices and services. They may not rise "right now" in relation to the increase in the money supply, but they will eventually rise to an equalibrium point according to supply and demand and the dilution of the dollar supply.

In a true deflation, from a historical perspective the most sought after things are the ones that retain the greatest percentage of their value in terms of the currency. Since the currency itself is the MOST LIQUID of all, it tends to retain the highest value during a deflation. Again, supply and demand, where there is a lessening of the dollar supply, thereby making the dollar itself more in demand. Unless gold and silver actually become a true CURRENCY in such times, they too will take a back seat to actual HARD CASH dollars, and will fall in relative value along with everything else, though being still a highly sought after item, they don't tend to drop as far or as fast as other less desirable items.

As far as an outlandish debt soaking up a hyper-inflation, again we're mixing up cause and effect to some degree, because without the creation of the additional debt, the hyper-inflation will not happen. The problem is that when money is created, the interest required to service the debt is not. And that simply creates a situation where it is necessary to continue the fiat pyramid scheme to keep the earlier debt "payable".

In the quoted article below posted by Joe B., it is stated that "Gold provides the ultimate arbiter of comparative value, it always has."

On it's face, and standing alone, that statement is nonsense. Gold is just one item of "comparative value" in a universe of all other items being their own "comparative value" against everything else. Someone trading cheese for eggs in Mongolia doesn't give a rat's patootie what the value of gold is when it comes to that individual trade. Someone buying a toaster at Wal Mart also doesn't care what the price of gold is, because in this case and the vast majority of all other trades or purchases, the price or value of gold is off the radar screen, and really has nothing whatsoever to do with the day to day trades and purchases of most humans, unless they are actually using the gold as a part of the trade. And even if the dollar were to become instantly worthless tomorrow, and a new currency took it's place, or anything was bartered in place of the "cash currency" other than gold, then the value of the gold remains a totally moot concern. We simply have too many gurus, analysts, and marketers trying to constantly convince us that gold is the ultimate form of wealth and value, like trying to convince us that one walnut on the tree is better than all the rest. That is just not the case. If you "NEED" food, fuel, heat, housing, or any other myriad of necessities in life, gold is not your primary concern. THE TRADE or having something to consumate the trade is your primary concern. If gold will help you get what you want, no problem. If the person you are trading with doesn't want gold, then you have to go a different route, where cash (in the instance of a major deflation) may be the preferred medium of exchange because of it's greater liquidity. If you already had the more liquid item, or the cash in this instance, you would have no additional worries about trading the metal for cash (likely taking a relative value loss in the process) and then using the cash for what you wanted. The metal in this case is still outside the realms of ultimate liquidity. As our system is now, "cash" is nothing more than "liquid debt", a constant swapping of IOUs. But so is the swapping of anything else that you do not have an immediate use for. This can easily include the precious metals, since obviously you are not going to build a house with them, use them to produce heat, or feed them to your children. The problem is that the metals (and other barter items) are less liquid by degree unless you can find someone who will take them in trade as a currency. As far as a "USE VALUE", you have to admit that the metals are somewhere down the ladder as long as the dollar (currency) is the more liquid medium of exchange and other items (food, fuel, shelter) have a greater use or survival value. But if the dollar (currency) ever ceases to be the most liquid medium of exchange, then all bets are off, and "USE VALUE" and "INSURANCE VALUE" become an entirely new issue and concern. What would take the dollars place in the interim? Gold and silver would play a major role as mediums of exchange, as would general barter of everything else.

I understand what you are saying too about all things "being equal" where inflation and wages and costs all going up in tandem, while deflation and wages and costs all go down in tandem. The problem is, there is never equal movement on a percentage basis from one item to the next. In our deflation, gold may lose 20 or 30 percent of it's value for example, while most everything else may drop 60 or 80 percent in dollar denominated or "currency denominated" value.

Suppose for a moment that gold is currently at $400 per ounce in dollar terms, and that after a pronounced deflation, it is only worth $200. That is a 50% drop in value of the metal. But what if everything else has dropped in value by much more than 50%, say 80 or 90 percent? Gold is still something that has shown an advantage by dropping in value at a slower rate or a smaller overall percentage, and has retained or even increased it's relative "purchasing power" in comparison to everything else........ "everything else" except the dollar, which as long as it is still used as the basis of determining value, has retained the greatest percentage of it's relative purchasing power. And this is the case for "CASH" during a deflation over anything else that is dropping in relative value to that cash. During a major deflation, you want to hold THE MOST LIQUID trade item available to take advantage of all other falling values during that period. Would you rather be in gold or silver as they drop in dollar denominated value, or would you rather be holding the dollars? Would you rather be holding gold as real estate prices plummet in relation to the gold? It's just a matter of holding the LEAST DEPRECIATING item, and thereby gaining the maximum relative "value advantage" in comparison to all other things....... simple concept.

[TheSimpleton]

I'll stand corrected on that.

TS

[Dissipate]

Prechter is the guy who predicted gold would fall to $200/oz and silver to $3/oz. This was last year when gold punched through $300 on its way to $400 and beyond. As we now know, he was as wrong as a man can be, and yet, people are still quoting him. Amazing.

Deflation? That's a good one. Check out the commodities charts, or the price of food, or automobiles, or health care, etc...looks like we're headed for hyperinflation.

The world is so different today than in 1929 that I see no point in comparing the crash with what lies ahead. Remember, the U.S. silver stockpile is gone, and unlike 1929, almost no one has any.

Right now, silver is holding at around $6.30. That's what the COMEX says it's worth. If you want to know what it's really worth, go to E Bay and check out the silver bullion auctions. It will surprise you. Right now, there is a 1 oz generic silver round (Buffalo head reproduction, no big deal) with six bidders, currently at $10. Add on an average cost of $3.50 for shipping and insurance, and the winning bidder is going to pay at least $13.50 for 1 oz of generic silver.

The value of a thing is what someone is willing to pay for it.

I think that is because of the "wow" aspect of the round. Its "pretty" to people so they will pay a premium for it. Check out the junk silver auctions, you will see that most of the winners of those are paying about what they should.

[Merlin]

It was 7 degress below zero here in Indiana last week when I suddenly wondered what use my gold American Eagles would be to me if either the electricity or the natural gas ceased to flow. Can't really heat the house with PMs. It was then that the idea of a wood burning stove in the family room and a cord of dry wood outside the kitchen door became a very warming thought. I'm inclined to believe that the safest strategy lies in diversification -- spread your investments around to minimize the risk.

In business school they teach that your investment risk declines to the extent that you own the total market. Of course most people think of stocks; but, truth be told, the total market includes such things as bonds, real estate, precious metals and, yes, dry wood and stoves. So, instead of trying to predict the effect of a deflationary crash on the purchasing power of gold, I vote for taking a broad, diversified approach to preparedness. After all, it is a daunting task to predict the future. GoldCookie is right about the advantages in a balanced portfolio.

I'm having trouble with the idea of storing a year's supply of food stuffs though. We'd have to learn a whole different way of cooking and eating if we did that. Can't imagine how the two of us would cycle through a 50-pound bag of flour once a year.

[IrishGold]

It was 7 degress below zero here in Indiana last week when I suddenly wondered what use my gold American Eagles would be to me if either the electricity or the natural gas ceased to flow. Can't really heat the house with PMs. It was then that the idea of a wood burning stove in the family room and a cord of dry wood outside the kitchen door became a very warming thought. I'm inclined to believe that the safest strategy lies in diversification -- spread your investments around to minimize the risk.

In business school they teach that your investment risk declines to the extent that you own the total market. Of course most people think of stocks; but, truth be told, the total market includes such things as bonds, real estate, precious metals and, yes, dry wood and stoves. So, instead of trying to predict the effect of a deflationary crash on the purchasing power of gold, I vote for taking a broad, diversified approach to preparedness. After all, it is a daunting task to predict the future. GoldCookie is right about the advantages in a balanced portfolio.

I'm having trouble with the idea of storing a year's supply of food stuffs though. We'd have to learn a whole different way of cooking and eating if we did that. Can't imagine how the two of us would cycle through a 50-pound bag of flour once a year.Don't stack that wood against the house. It is a breading ground for termites and they will migrate right to the studs in your house!
Gold is not affected by termites!

[lhslancers3270]

I think Prechter is wrong but it is still open to conjecture until gold closes above 505 IMHO.

[Ander]

Well, having read conquer the crash, I have to defend Prechter on two points:

1) He said that even though he thought gold would go lower, he said you should STILL buy some gold and silver because in a crash they would decline less than everything else, and would rise after the crash.

2) He said that it was possible that instead of deflation, governments could take the hyperinflation route, by destroying their currencies in an effort to prevent deflation, and that in this case, you would want to be in gold and silver.


Of course, he is now still saying that gold will fall...